Margin blues may take toll on bank scrips

MARKET WATCH

Pressure on lenders to cut rates will hit profits, say analysts.

Banking stocks are likely to drop next week as their fourth quarter earnings are expected to be under pressure, according to analysts and brokers. Information technology shares are seen moving in line with the broad markets due to lack of triggers.

Some of the state-run banks have lowered the benchmark prime lending rate (PLR) in the last one month. The move is likely to put pressure on banks' profitability.

"Banks are cutting deposit rates, but not lending rates. This will put pressure on their margins in the short run. However, going ahead, banks are not likely to renew the high-cost deposits, which will ease the margin pressure," said Saday Sinha, analyst with Kotak Securities.

According to a report prepared by CLSA India, the cost of term deposits are 500-600 bps higher than current and savings accounts and a rising proportion of term deposits will increase margin pressure for state-run banks.

"There is some more pain still left. The positive side is downside risk is limited," said a banking analyst at a domestic brokerage house.

Banks may have to further cut their home loan rates as Finance Minister P Chidambaram said on Thursday that there was scope for banks to lower rates on home loans up to Rs 20 lakh.

The finance minister had earlier said, "I wish the rates come down," prompting banks to cut rates in February. "If the pricing power of banks is regulated, then it creates a negative sentiment for investors," Sinha said.

Bank stocks were hammered this week, with most of the counters registering a fall of around 20 per cent compared with the last week's closing price.

Lack of clarity
To add to worries, clarity is yet to emerge on the Rs 60,000 crore farm loan waiver announced in the Budget. While the minister has proposed to waive all dues of small and marginal farmers, others will get a 25 per cent waiver if going for a one-time settlement. All loans overdue as of December 31, 2007, and unpaid until February 29, 2008, will come under the scheme.

According to the CLSA report, scheduled commercial banks account for 58 per cent of the total agricultural lending, while their share in the total agricultural non-performing assets (NPAs) is just 17 per cent. "Cooperative banks account for 33 per cent of agricultural loans and 76 per cent of agricultural NPAs," the report said.

According to CLSA's estimates, scheduled commercial banks will write off Rs 10,000 crore, while the balance would be written off by cooperative banks and regional rural banks.